Semi-Annual Report. August 31, PPTY U.S. DIVERSIFIED REAL ESTATE ETF Ticker: PPTY

Transcription

1 Semi-Annual Report August 31, 2018 PPTY U.S. DIVERSIFIED REAL ESTATE ETF Ticker: PPTY

2 TABLE OF CONTENTS Page Letter to Shareholders Portfolio Allocation Schedules of Investments Statement of Assets and Liabilities Statement of Operations Statement of Changes in Net Assets Financial Highlights Notes to Financial Statements Expense Example Approval of Advisory Agreements & Board Consideration Information About Portfolio Holdings Information About Proxy Voting Information about the Trustees Frequency Distribution of Premiums and Discounts

3 Dear Shareholders, On behalf of the entire team, we want to express our appreciation for the confidence you have placed in the PPTY U.S. Diversified Real Estate ETF ( PPTY or the Fund ). The following information pertains to the fiscal period of inception through August 31, The Fund seeks to track the total return performance, before fees and expenses, of the PPTYX U.S. Diversified Real Estate Index (the Index ). The Index is a passive, rules-based strategy index of US real estate equity securities of issuers domiciled and traded in the United States. The Fund had positive performance during the fiscal period ending on August 31, The market price for PPTY increased 15.87% and the NAV increased 15.85%, while the S&P 500, a broad market index, gained 10.07% and the Morningstar U.S. Real Estate Index gained 16.17% over the same period. The Fund s Index returned 15.59%. Meanwhile, outstanding shares ended the period at 2,850,000. For the period, the largest positive contributor to return was AvalonBay Communities Inc (AVB US), adding 0.58% to the return of the Fund, gaining 17.43% with an average weighting of 3.31%. The second largest contributor to return was Equity Residential (EQR US), adding 0.57% to the return of the Fund, gaining 15.85% with an average weighting of 3.63%. The third largest contributor to return was Mid- America Apartment Communities Inc (MAA US), adding 0.56% to the return of the Fund, gaining 20.19% with an average weighting of 2.81%. For the period, the largest negative contributor to return was Marriott International Inc/MD (MAR US), detracting 0.15% from the return of the Fund, declining 8.39% with an average weighting of 1.56%. The security contributing second-most negatively was Wyndham Destinations Inc (WYND US), detracting 0.06% from the return of the Fund, and declining 13.67% with an average weighting of 0.39%. The third largest negative contributor to return was Hilton Worldwide Holdings Inc (HLT US), detracting 0.03% from the return of the Fund, and declining 2.58% with an average weight of 0.93%. For the period, the best performing security in the Fund was Seritage Growth Properties (SRG US), gaining 46.93% and contributing 0.07% to the return of the fund. The second-best performing security for the period was LaSalle Hotel Properties (LHO US), gaining 44.02% and contributing 0.10% to the return of the fund. The third-best performing security was CareTrust REIT Inc (CTRE US), gaining 41.06% for the period and contributing 0.13% to the return of the fund. For the period, the worst performing security in the Fund was Wyndham Destinations Inc (WYND US), declining 13.67% and reducing the return of the fund by 0.06%. The second-worst performing security in the Fund was Marriott International Inc/MD (MAR US), declining 8.39% and reducing the return of the fund by 0.15%. The third- 1

4 worst performing security in the Fund was CorePoint Lodging Inc (CPLG US), declining 8.03% and reducing the return of the fund by 0.01%. Sincerely, Garrett Stevens, Chief Executive Officer Exchange Traded Concepts, Advisor to the Fund Must be preceded or accompanied by the most recent prospectus. Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal. Because the Fund is a fund of funds, its investment performance largely depends on the investment performance of the Underlying Funds in which it invests. An investment in the Fund is subject to the risks associated with the Underlying Funds that comprise the Index, including risks related to investments in derivatives, REITs, foreign securities and municipal securities. Fixed-income securities prices generally fall as interest rates rise. High yield securities are subject to the increased risk of an issuers inability to meet principal and interest payment obligations. These securities may be subject to greater price volatility due to such factors as specific corporate developments, interest rate sensitivity, negative perceptions of the non-investment grade securities markets, real or perceived adverse economic conditions, and lower liquidity. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock. International investments may also involve risk from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, and from economic or political instability. There is no guarantee that the fund will meet its investment objective. The Fund may invest in derivatives, including futures contracts, which are often more volatile than other investments and may magnify the Funds gains or losses. Leverage may cause the effect of an increase or decrease in the value of the portfolio securities to be magnified and the fund to be more volatile than if leverage was not used. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered to be non-diversified, as a result, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. The PPTYX - U.S. Diversified Real Estate Index constructed beginning with the universe of U.S.-listed equity securities with a market capitalization of at least $750 million and meeting certain liquidity thresholds (the Equity Universe ). Companies in the Equity Universe are then screened to keep only those that derive at least 85% of their income from ownership or management of real property. Companies that meet this criterion are then screened to remove companies that are externally managed or that have a low percentage of their shares directly or indirectly available to the public. The companies remaining after the above screens will constitute the Index. The Index is designed to ensure diversification by property type and by location, while favoring companies with prudent leverage (i.e., the debt-to-enterprise value ratio of real estate investments), all subject to a maximum individual security weighting of 4% at the time of each reconstitution of the Index. The Index is expected to be primarily composed of companies that qualify as real estate investment trusts ( REITs ), but may also include real estate companies that do not qualify as REITs. The Standard & Poor s 500 Index (S&P 500) is an unmanaged index containing common stocks of 500 industrial, transportation, utility, and financial companies, regarded as generally representative of the U.S. stock market. The index return reflects the reinvestment of income dividends and capital gain distributions, if 2

5 any, but does not reflect fees, brokerage commissions, or other expenses of investing. You cannot invest directly in an index. The Morningstar US REIT Index SM is a free-float-weighted index that tracks the performance of publicly listed real estate investment trusts, or REITs. The qualifying REITs are identified by Morningstar s proprietary Global Equity Classification Structure. Fund holdings and sector allocations are subject to change at any time and are not a recommendation to buy or sell any security. Please see the Schedule of Investments for a complete list of Fund holdings. Opinions expressed are those of the Fund manager and are subject to change, are not guaranteed and should not be considered investment advice. Quasar Distributors, LLC, distributor. 3

6 PORTFOLIO ALLOCATION As of August 31, 2018 (Unaudited) Percentage of Asset Type Net Assets Common Stocks 4.2% Real Estate Investment Trusts 95.6% Short-Term Investments 0.2% Other Assets in Excess of Liabilities 0.0% (a) Total 100.0% (a) Less than 0.05% 4

7 SCHEDULE OF INVESTMENTS August 31, 2018 (Unaudited) Shares Security Description Value COMMON STOCKS 4.2% Consumer Discretionary 3.9% 2,836 Choice Hotels International, Inc $ 221,350 10,400 Extended Stay America, Inc ,872 9,432 Hilton Worldwide Holdings, Inc ,112 3,822 Hyatt Hotels Corporation ,670 9,629 Marriott International, Inc ,217,779 6,931 Wyndham Destinations, Inc ,350 4,191 Wyndham Hotels & Resorts, Inc ,839 3,220,972 Health Care 0.3% 3,442 National HealthCare Corporation ,275 TOTAL COMMON STOCKS (Cost $3,591,176) ,486,247 REAL ESTATE INVESTMENT TRUSTS 95.6% Diversified 10.5% 3,790 Alexander & Baldwin, Inc ,951 18,438 American Assets Trust, Inc ,301 49,686 Empire State Realty Trust, Inc ,977 15,911 Forest City Realty Trust, Inc ,162 8,952 Lexington Realty Trust ,612 23,338 Liberty Property Trust ,021,038 17,604 PS Business Parks, Inc ,296, ,508 VEREIT, Inc ,076,272 2,868 Washington Real Estate Investment Trust ,514 14,263 WP Carey, Inc ,631 8,608,547 Health Care 7.4% 15,550 CareTrust REIT, Inc ,898 29,045 HCP, Inc ,086 12,156 Healthcare Realty Trust, Inc ,350 16,477 Healthcare Trust of America, Inc ,748 6,697 LTC Properties, Inc ,076 6,228 Medical Properties Trust, Inc ,731 4,418 National Health Investors, Inc ,127 14,597 Omega Healthcare Investors, Inc ,431 21,776 Physicians Realty Trust ,862 The accompanying notes are an integral part of these financial statements. 5

8 SCHEDULE OF INVESTMENTS August 31, 2018 (Unaudited) (Continued) Shares Security Description Value REAL ESTATE INVESTMENT TRUSTS 95.6% (Continued) Health Care 7.4% (Continued) 3,558 Sabra Health Care REIT, Inc $ 83,898 19,003 Ventas, Inc ,137,709 19,401 Welltower, Inc ,294,240 6,053,156 Hotel & Resort 3.3% 13,376 Apple Hospitality REIT, Inc ,086 3,504 Chatham Lodging Trust ,161 5,500 Chesapeake Lodging Trust ,005 14,777 DiamondRock Hospitality Company ,733 24,192 Host Hotels & Resorts, Inc ,854 6,708 LaSalle Hotel Properties ,518 10,103 Park Hotels & Resorts, Inc ,945 5,218 Pebblebrook Hotel Trust ,467 3,504 RLJ Lodging Trust ,773 2,964 Ryman Hospitality Properties, Inc ,996 5,595 Summit Hotel Properties, Inc ,819 12,636 Sunstone Hotel Investors, Inc ,032 3,624 Xenia Hotels & Resorts, Inc ,918 2,681,307 Industrial 13.5% 3,714 Americold Realty Trust ,479 40,791 Duke Realty Corporation ,162,136 8,751 EastGroup Properties, Inc ,210 29,801 First Industrial Realty Trust, Inc ,340 3,421 Gramercy Property Trust ,564 53,981 Monmouth Real Estate Investment Corporation ,730 48,132 Prologis, Inc ,233,512 8,826 Rexford Industrial Realty, Inc ,845 45,174 STAG Industrial, Inc ,304,173 56,059 Terreno Realty Corporation ,153,226 11,083,215 Office 15.8% 7,219 Alexandria Real Estate Equities, Inc ,559 9,451 Boston Properties, Inc ,232,883 4,933 Brandywine Realty Trust ,677 The accompanying notes are an integral part of these financial statements. 6

9 SCHEDULE OF INVESTMENTS August 31, 2018 (Unaudited) (Continued) Shares Security Description Value REAL ESTATE INVESTMENT TRUSTS 95.6% (Continued) Office 15.8% (Continued) 3,804 Columbia Property Trust, Inc $ 91,600 17,046 Corporate Office Properties Trust ,676 69,743 Cousins Properties, Inc ,097 18,727 Douglas Emmett, Inc ,477 85,480 Easterly Government Properties, Inc ,730,969 44,345 Equity Commonwealth (a) ,421,700 23,667 Highwoods Properties, Inc ,177,197 35,296 Hudson Pacific Properties, Inc ,194,417 10,466 JBG SMITH Properties ,056 13,263 Kilroy Realty Corporation ,056 5,440 Paramount Group, Inc ,387 29,501 Piedmont Office Realty Trust, Inc ,300 8,049 SL Green Realty Corporation ,316 3,352 Tier REIT, Inc ,912 3,837 Vornado Realty Trust ,449 13,015,728 Residential 22.2% 5,973 American Campus Communities, Inc ,448 83,969 American Homes 4 Rent ,948,081 31,845 Apartment Investment & Management Company ,394,811 15,941 AvalonBay Communities, Inc ,921,826 16,510 Camden Property Trust ,569,441 4,232 Education Realty Trust, Inc ,120 8,587 Equity LifeStyle Properties, Inc ,909 43,719 Equity Residential ,961,962 4,816 Essex Property Trust, Inc ,186,084 3,379 Invitation Homes, Inc ,967 23,785 Mid-America Apartment Communities, Inc ,463,175 8,107 Sun Communities, Inc ,480 42,303 UDR, Inc ,690,851 18,309,155 Retail 13.3% 26,548 Acadia Realty Trust ,149 6,768 Agree Realty Corporation , Alexander s, Inc ,408 4,832 Brixmor Property Group, Inc ,039 The accompanying notes are an integral part of these financial statements. 7

10 SCHEDULE OF INVESTMENTS August 31, 2018 (Unaudited) (Continued) Shares Security Description Value REAL ESTATE INVESTMENT TRUSTS 95.6% (Continued) Retail 13.3% (Continued) 4,737 DDR Corporation $ 66,271 8,489 Federal Realty Investment Trust ,108,748 13,113 Getty Realty Corporation ,719 5,992 Kimco Realty Corporation ,523 4,532 Kite Realty Group Trust ,219 13,541 National Retail Properties, Inc ,105 5,928 Ramco-Gershenson Properties Trust ,755 14,212 Realty Income Corporation ,397 12,469 Regency Centers Corporation ,328 51,539 Retail Opportunity Investments Corporation ,017,380 43,612 Retail Properties of America, Inc ,181 4,676 Saul Centers, Inc ,560 2,110 Seritage Growth Properties ,623 9,522 Simon Property Group, Inc ,742,811 9,792 Spirit Realty Capital, Inc ,959 3,204 Tanger Factory Outlet Centers, Inc ,088 1,268 Taubman Centers, Inc ,925 10,905 The Macerich Company ,560 15,430 Urban Edge Properties ,730 12,258 Urstadt Biddle Properties, Inc ,870 10,063 Weingarten Realty Investors ,249 10,988,847 Specialized 9.6% 5,248 CoreSite Realty Corporation ,235 6,976 CubeSmart ,117 11,541 CyrusOne, Inc ,785 16,572 Digital Realty Trust, Inc ,059,568 5,350 Equinix, Inc ,333,296 3,581 Extra Space Storage, Inc ,204 2,055 Life Storage, Inc ,568 5,345 National Storage Affiliates Trust ,584 3,171 Public Storage ,091 11,662 QTS Realty Trust, Inc ,303 7,879,751 TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $72,793,085) ,619,706 The accompanying notes are an integral part of these financial statements. 8

11 SCHEDULE OF INVESTMENTS August 31, 2018 (Unaudited) (Continued) Shares Security Description Value SHORT-TERM INVESTMENTS 0.2% Money Market Funds 0.2% 188,363 First American Treasury Obligations Fund, Class X, 1.854% (b) $ 188,363 TOTAL SHORT-TERM INVESTMENTS (Cost $188,363) ,363 TOTAL INVESTMENTS 100.0% (Cost $76,572,624) ,294,316 Other Assets in Excess of Liabilities 0.0% (c) ,841 NET ASSETS 100.0% $82,320,157 (a) Non-Income Producing Security. (b) Annualized seven-day yield as of August 31, (c) Less than 0.05%. The Global Industry Classification Standard (GICS ) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor s Financial Services LLC ( S&P ). GICS is a service mark of MSCI, Inc. and S&P and has been licensed for use by the Fund s Administrator, U.S. Bancorp Fund Services, LLC. The accompanying notes are an integral part of these financial statements. 9

12 STATEMENT OF ASSETS & LIABILITIES August 31, 2018 (Unaudited) ASSETS Investments in Securities, at Value* $82,294,316 Cash Interest and Dividends Receivable ,929 Total Assets ,355,258 LIABILITIES Management Fees Payable ,101 Total Liabilities ,101 NET ASSETS $82,320,157 NET ASSETS CONSIST OF: Paid-in Capital $75,667,489 Undistributed Net Investment Income ,324 Accumulated Net Realized Gain on: Investments in Securities ,652 Net Unrealized Appreciation on: Investments in Securities ,721,692 Net Assets $82,320,157 Net Asset Value (unlimited shares authorized): Net Assets $82,320,157 Shares Outstanding (No Par Value) ,850,000 Net Asset Value, Offering and Redemption Price per Share $ * Identified Cost: Investments in Securities $76,572,624 The accompanying notes are an integral part of these financial statements. 10

13 STATEMENT OF OPERATIONS Period Ended August 31, 2018 (a) (Unaudited) INVESTMENT INCOME Dividends $ 662,435 Interest Total Investment Income ,946 EXPENSES Management Fees ,571 Total Expenses ,571 Net Investment Income ,375 REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net Realized Gain on: Investments in Securities ,652 Net Change in Unrealized Appreciation of: Investments in Securities ,721,692 Net Realized and Unrealized Gain on Investments ,249,344 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,801,719 (a) The Fund commenced operations on March 26, The accompanying notes are an integral part of these financial statements. 11

14 STATEMENT OF CHANGES IN NET ASSETS Period Ended August 31, 2018 (a) (Unaudited) OPERATIONS Net Investment Income $ 552,375 Net Realized Gain on Investments ,652 Change in Unrealized Appreciation of Investments ,721,692 Net Increase in Net Assets Resulting from Operations ,801,719 DISTRIBUTIONS TO SHAREHOLDERS From Net Investment Income (149,051) Total Distributions to Shareholders (149,051) CAPITAL SHARE TRANSACTIONS Proceeds from Shares Sold ,198,590 Payments for Shares Redeemed (5,531,130) Transaction Fees (Note 5) Net Increase in Net Assets Derived from Capital Share Transactions (b) ,667,489 Net Increase in Net Assets $82,320,157 NET ASSETS Beginning of Period $ End of Period $82,320,157 Undistributed Net Investment Income $ 403,324 (a) The Fund commenced operations on March 26, (b) Summary of capital share transactions is as follows: Shares Shares Sold ,050,000 Shares Redeemed (200,000) Net Increase ,850,000 The accompanying notes are an integral part of these financial statements. 12

15 FINANCIAL HIGHLIGHTS For a capital share outstanding throughout the period Period Ended August 31, 2018 (Unaudited) (a) Net Asset Value, Beginning of Period $25.00 INCOME FROM INVESTMENT OPERATIONS: Net Investment Income (b) Net Realized and Unrealized Gain on Investments Total from Investment Operations LESS DISTRIBUTIONS: From Net Investment Income (0.07) Total Distributions (0.07) Transaction Fees (See Note 5) (c) Net Asset Value, End of Period $28.88 Total Return % (d) SUPPLEMENTAL DATA: Net Assets at End of Period (000 s) $82,320 RATIOS TO AVERAGE NET ASSETS: Expenses to Average Net Assets Net Investment Income to Average Net Assets Portfolio Turnover Rate (f) % (e) 2.65% (e) 9% (d) (a) Commencement of operations on March 26, (b) Calculated based on average shares outstanding during the period. (c) Less than $ (d) Not annualized. (e) Annualized. (f) Excludes impact of in-kind transactions. The accompanying notes are an integral part of these financial statements. 13

16 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) NOTE 1 ORGANIZATION PPTY U.S. Diversified Real Estate ETF (the Fund ) is a diversified series of ETF Series Solutions ( ESS ) or (the Trust ), an open-end management investment company consisting of multiple investment series, organized as a Delaware statutory trust on February 9, The Trust is registered with the Securities and Exchange Commission ( SEC ) under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company and the offering of the Fund s shares is registered under the Securities Act of 1933, as amended (the Securities Act ). The investment objective of the Fund is to track the performance, before fees and expenses, of the PPTYX U.S. Diversified Real Estate Index (the Index ). The Fund commenced operations on March 26, NOTE 2 SIGNIFICANT ACCOUNTING POLICIES The Fund is an investment company and accordingly follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board ( FASB ) Accounting Standard Codification Topic 946 Financial Services Investment Companies. The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ). A. Security Valuation. All equity securities, including domestic and foreign common stocks, preferred stocks, and exchange traded funds a that are traded on a national securities exchange, except those listed on the Nasdaq Global Market, Nasdaq Global SelectMarket and Nasdaq Capital Market Exchange (collectively Nasdaq ), are valued at the last reported sale price on the exchange on which the security is principally traded. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price ( NOCP ). If, on a particular day, an exchangetraded or Nasdaq security does not trade, then the mean between the most recent quoted bid and asked prices will be used. All equity securities that are not traded on a listed exchange are valued at the last sale price in the over-the-counter market. If a non-exchange traded security does not trade on a particular day, then the mean between the last quoted closing bid and asked price will be used. Prices denominated in foreign currencies are converted to U.S. dollar equivalents at the current exchange rate, which approximates fair value. Investments in mutual funds, including money market funds, are valued at their net asset value ( NAV ) per share. Short-term securities, including repurchase agreements, that have maturities of less than 60 days at the time of purchase, are valued at amortized cost, which, when combined with accrued interest, approximates fair value. 14

17 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) (Continued) Securities for which quotations are not readily available are valued at their respective fair values in accordance with pricing procedures adopted by the Fund s Board of Trustees (the Board ). When a security is fair valued, consideration is given to the facts and circumstances relevant to the particular situation, including a review of various factors set forth in the pricing procedures adopted by the Board. The use of fair value pricing by the Fund may cause the NAV of their shares to differ significantly from the NAV that would be calculated without regard to such considerations. As described above, the Fund utilizes various methods to measure the fair value of their investments on a recurring basis. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuations methods. The three levels of inputs are: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Level 2 Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. Level 3 Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing the Fund s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available. The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety. 15

18 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) (Continued) The following is a summary of the inputs used to value the Fund s investments as of August 31, 2018: Description^ Level 1 Level 2 Level 3 Total Common Stocks $ 3,486,247 $ $ $ 3,486,247 Real Estate Investment Trusts 78,619,706 78,619,706 Short-Term Investments 188, ,363 Total Investments in Securities $82,294,316 $ $ $82,294,316 ^ See Schedule of Investments for sector breakouts. For the period ended August 31, 2018, there were no transfers into or out of Levels 1, 2 or 3. It is the Fund s policy to record transfers into or out of Levels at the end of the period. B. Security Transactions and Investment Income. Investment securities transactions are accounted for on the trade date. Gains and losses realized from investment transactions are determined on a specific identification basis. Dividend income is recorded on the ex-dividend date. Withholding taxes on foreign dividends have been provided for in accordance with the Fund s understanding of the applicable tax rules and regulations. Interest income is recorded on an accrual basis. Distributions received from a Fund s investments in Real Estate Investment Trust ( REIT ) may be characterized as ordinary income, net capital gain, or a return of capital. The proper characterization of REIT distributions is generally not known until after the end of each calendar year. As such, the Fund must use estimates in reporting the character of their income and distributions for financial statement purposes. The actual character of distributions to a Fund s shareholders will be reflected on the Form 1099 received by shareholders after the end of the calendar year. Due to the nature of REIT investments, a portion of the distributions received by a Fund s shareholders may represent a return of capital. C. Federal Income Taxes. The Fund s policy is to comply with the provisions of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of their net investment income and net capital gains to shareholders. Therefore, no federal income tax provision is required. The Fund plans to file U.S. Federal and various state and local tax returns. The Fund recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained. Management has analyzed the Fund s uncertain tax positions and conclude that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Income and capital gain distributions are determined in 16

19 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) (Continued) accordance with federal income tax regulations, which may differ from U.S. GAAP. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits on uncertain tax positions as income tax expenses in the Statement of Operations. During the period ended August 31, 2018, the Fund did not incur any interest or penalties. D. Distributions to Shareholders. Distributions to shareholders from net investment income for the Fund are declared and paid on a quarterly basis and distributions from net realized gains on securities are normally declared and paid on an annual basis. Distributions are recorded on the ex-dividend date. E. Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. F. Share Valuation. The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding for the Fund. The Fund s shares will not be priced on the days on which the NYSE is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund s NAV per share. G. Guarantees and Indemnifications. In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund s maximum exposure under these arrangements is unknown as this would involve future claims that may be against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. H. Subsequent Events. In preparing these financial statements, Management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were available to be issued. There were no events or transactions that occurred during the period subsequent to August 31, 2018, that materially impacted the amounts or disclosures in the Fund s financial statements. I. Accounting Pronouncement. In August 2018, FASB issued ASU , Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement ( ASU ). The primary focus of ASU is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, An entity is permitted to early adopt the 17

20 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) (Continued) removed or modified disclosures upon the issuance of ASU and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management is currently evaluating the impact these changes will have on the Fund s financial statements and disclosures. NOTE 3 COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS Exchange Traded Concepts, LLC (the Adviser ) serves as the investment adviser to the Fund. Pursuant to an Investment Advisory Agreement ( Advisory Agreement ) between the Trust, on behalf of the Fund, and the Adviser, the Adviser provides investment advice to the Fund and oversees the day-to-day operations of the Fund, subject to the direction and control of the Board and the officers of the Trust. Vident Investment Advisory, LLC is the Sub-Adviser (the Sub-Adviser ) for the Fund. Under the Advisory Agreement, the Adviser is also responsible for arranging, in consultation with the Sub-Adviser, transfer agency, custody, fund administration, securities lending and accounting, and other nondistribution related services necessary for the Fund to operate. Under the Advisory Agreement, the Adviser has agreed to pay all expenses of the Fund, except for: the fee paid to the Adviser pursuant to the Advisory Agreement, interest charges on any borrowings, taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees and expenses, accrued deferred tax liability, extraordinary expenses and distribution (12b-1) fees and expenses. For services provided to the Fund, the Fund paid the Adviser 0.53% at an annual rate based on the Fund s average daily net assets. U.S. Bancorp Fund Services, LLC ( Fund Services or Administrator ), doing business as U.S. Bank Global Fund Services, acts as the Fund s Administrator and, in that capacity, performs various administrative and accounting services for the Fund. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund, including regulatory compliance monitoring and financial reporting; prepares reports and materials to be supplied to the trustees; monitors the activities of the Fund s Custodian, transfer agent and accountant and fund accountant. Fund Services also serves as the transfer agent to the Fund. U.S. Bank N.A. (the Custodian ), an affiliate of Fund Services, serves as the Fund s Custodian. Quasar Distributors, LLC, (the Distributor ) acts as the Fund s principal underwriter in a continuous public offering of the Fund s shares. The Distributor is an affiliate of the Administrator. A Trustee and all officers of the Trust are affiliated with the Administrator, Distributor, and Custodian. NOTE 4 PURCHASES AND SALES OF SECURITIES For the period ended August 31, 2018, purchases and sales of securities by the Fund, excluding short-term securities and in-kind transactions, were as follows: 18

21 NOTES TO FINANCIAL STATEMENTS August 31, 2018 (Unaudited) (Continued) Purchases Sales PPTY U.S. Diversified Real Estate ETF $6,411,076 $4,563,759 For the period ended August 31, 2018, in-kind transactions associated with creations and redemptions were as follows: Purchases Sales PPTY U.S. Diversified Real Estate ETF $79,559,946 $ 5,535,712 There were no purchases or sales of U.S. Government securities in the Fund during the period. NOTE 5 SHARE TRANSACTIONS Shares of the Fund are listed and traded on New York Stock Exchange Arca, Inc. ( NYSE Arca ). Market prices for the shares may be different from their NAV. The Fund issues and redeems shares on a continuous basis at NAV only in blocks of 50,000 shares, called Creation Units. Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, shares generally trade in the secondary market at market prices that change throughout the day. Except when aggregated in Creation Units, shares are not redeemable securities of a Fund. Shares of a Fund may only be purchased or redeemed by certain financial institutions ( Authorized Participants ). An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem the shares directly from a Fund. Rather, most retail investors may purchase shares in the secondary market with the assistance of a broker and are subject to customary brokerage commissions or fees. The Fund currently offers one class of shares, which have no front end sales load, no deferred sales charge, and no redemption fee. A fixed transaction fee is imposed for the transfer and other transaction costs associated with the purchase or sale of Creation Units. The standard fixed transaction fee for the Fund is $250, payable to the custodian. In addition, a variable fee may be charged on all cash transactions or substitutes for Creation Units of up to a maximum of 2% as a percentage of the value of the Creation Units subject to the transaction. Variable fees received by the Fund are displayed in the Capital Share Transactions section of the Statement of Changes in Net Assets. The Fund may issue an unlimited number of shares of beneficial interest, with no par value. NOTE 6 BENEFICIAL OWNERSHIP The beneficial ownership, either directly or indirectly, of 25% or more of the voting securities of a fund creates a presumption of control of a fund, under section 2(a)(9) of the 1940 Act. At August 31, 2018, the Fund is not aware of any shareholders owning greater than 25% of the outstanding shares of the Fund. 19

22 EXPENSE EXAMPLE For the Period Ended August 31, 2018 (Unaudited) As a shareholder of PPTY U.S. Diversified Real Estate ETF (the Fund ) you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Fund shares, and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (March 26, 2018 August 31, 2018). Actual Expenses The first line of the table provides information about actual account values based on actual returns and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled Expenses Paid During the Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Funds actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher. Beginning Ending Expenses Account Value Account Value Paid During Annualized March 26, 2018 (a) August 31, 2018 the Period Expense Ratio Actual $1, $1, $2.48 (b) 0.53% Hypothetical (5% annual return before expenses) $1, $1, $2.70 (c) 0.53% (a) Fund commencement. (b) The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio multiplied by the average account value during the period, multiplied by 158/365, to reflect the period. (c) The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio multiplied by the average account value during the period, multiplied by 184/365, to reflect the one-half year period. 20

23 APPROVAL OF ADVISORY AGREEMENTS & BOARD CONSIDERATION (Unaudited) Pursuant to Section 15(c) of the Investment Company Act of 1940 (the 1940 Act ), at a meeting held on January 18, 2018 (the Meeting ), the Board of Trustees (the Board ) of ETF Series Solutions (the Trust ) considered the approval of the following agreements (collectively, the Agreements ): the Advisory Agreement (the Advisory Agreement ) between Exchange Traded Concepts, LLC (the Adviser ) and the Trust, on behalf of the PPTY U.S. Diversified Real Estate ETF (the Fund ), and the Sub-Advisory Agreement (the Sub-Advisory Agreement ) between the Adviser, the Trust, on behalf of the Fund, and Vident Investment Advisory, LLC (the Sub-Adviser ). Prior to the Meeting, the Board, including the Trustees who are not parties to the Agreements or interested persons of any party thereto, as defined in the 1940 Act (the Independent Trustees ), reviewed written materials from the Adviser and Sub-Adviser (the Materials ) regarding, among other things: (i) the nature, extent, and quality of the services to be provided by the Adviser and Sub-Adviser; (ii) the cost of the services to be provided and the profits estimated to be realized by the Adviser and its affiliates from services rendered to the Fund; (iii) comparative fee and expense data for the Fund and other investment companies with similar investment objectives; (iv) the extent to which economies of scale are expected to be realized as the Fund grows and whether the advisory fee for the Fund reflects these economies of scale for the benefit of the Fund; and (v) any other financial benefits to the Adviser, the Sub-Adviser, or their affiliates resulting from services rendered to the Fund. Prior to the Meeting, representatives from the Adviser and Sub-Adviser, along with other service providers of the Fund, presented written information to help the Board evaluate each firm s fees and other aspects of the Agreements. Additionally, a representative from the Adviser provided an oral overview of the Fund s strategy, the services to be provided to the Fund by the Adviser and Sub-Adviser, and additional information about the Adviser s personnel and other clients. The Board then discussed the written materials and oral presentation that it had received and any other information that the Board received at the Meeting, and deliberated on the approval of the Agreements in light of this information. In its deliberations, the Board did not identify any single piece of information discussed below that was all-important or controlling. Approval of the Advisory Agreement with the Adviser Nature, Extent, and Quality of Services to be Provided. The Board considered the scope of services to be provided under the Advisory Agreement, noting that the Adviser will be providing investment management services to the Fund. In considering the nature, extent, and quality of the services to be provided by the Adviser, the Board considered the quality of the Adviser s compliance infrastructure and past reports from the Trust s 21

24 APPROVAL OF ADVISORY AGREEMENTS & BOARD CONSIDERATION (Unaudited) (Continued) Chief Compliance Officer regarding his review of the Adviser s compliance program and the Adviser s experience managing other series of the Trust. The Board noted that it had received a copy of the Adviser s registration form ( Form ADV ), as well as the response of the Adviser to a detailed series of questions which included, among other things, information about the background and experience of the firm s key personnel and the ownership structure of the firm. The Board also considered other services to be provided to the Fund, such as monitoring adherence to the Fund s investment restrictions and monitoring compliance with various Fund policies and procedures and with applicable securities regulations and monitoring the extent to which the Fund achieved its investment objective as a passively-managed fund. The Board noted that the Adviser currently serves as the adviser to other series of the Trust. Historical Performance. The Board noted that the Fund had not yet commenced operations and concluded that performance of the Fund, thus, was not a relevant factor in their deliberations. The Board also considered that, because the Fund is designed to track the performance of an index and the trading for the Fund would be handled by the Sub-Adviser, the Fund s performance would not be the direct result of investment decisions made by the Adviser. Consequently, with respect to the Fund s performance, the Board in the future would focus on the Adviser s oversight of the Sub-Adviser s services, including whether the Fund s performance exhibited significant tracking error. Cost of Services Provided and Economies of Scale. The Board reviewed the estimated expense ratio for the Fund and compared it to the universe of U.S. Real Estate ETFs as reported by Morningstar ( Category Peer Group ). The Board noted that the expense ratio for the Fund was above the median of the Category Peer Group but noted that most of the other funds in the Category Peer Group were part of larger fund families and consequently, may benefit from an unusually low cost structure based on the scale of their fund family. The Board noted that the Fund s expense ratio was reasonable given the proprietary and specialized nature of the Fund s index. The Board took into consideration that the advisory fee for the Fund was a unified fee, meaning that the Fund would pay no expenses other than the advisory fee and certain other costs such as interest, brokerage, acquired fund fees and expenses, extraordinary expenses and, to the extent it is implemented, fees pursuant to a Distribution and/or Shareholder Servicing (12b-1) Plan. The Board noted that the Adviser would be responsible for compensating the Trust s other service providers and paying the Fund s other expenses out of its own fee and resources. The Board also evaluated the compensation and benefits expected to be received by the Adviser from its relationship with the Fund, taking into account an analysis of the Adviser s profitability with respect to the Fund and the financial resources the Adviser had committed and proposed to commit to its business. The Board determined that such analyses were not a 22